Do Natural Disasters Shape Risk Attitudes?

Manisha Shah, University of California, Irvine
Lisa Cameron, Monash University

Globally, more and more individuals are living in a world of increasing natural disasters, and a disproportionate share of the damage caused by such environmental shocks are borne by people in developing countries. In Indonesia, the two most commonly occurring natural disasters are earthquakes and floods. We study whether natural disasters affect risk attitudes. We investigate this issue using experimental data from rural Indonesian households which we collected in 2008. We play standard risk games (using real money) with randomly selected individuals and test whether players living in villages that have been exposed to earthquakes or floods exhibit more risk aversion. We find that individuals in villages that suffered a flood or earthquake in the past three years exhibit more risk aversion than otherwise like individuals living in villages that did not experience a disaster. For particularly severe shocks, this effect is long-lived. This change in risk taking behavior has important implications for economic development.